How Do Insurance Companies Use Credit Scores?
If you're shopping for auto or homeowner's insurance, insurers may look at your credit score to predict what type of customer you will be. There are different credit scores with various ranges, and insurers have their own methods for tallying them. Generally, a score above 700 is viewed more favorably than one that falls below 600.
Other People Are Reading
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Function
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The U.S. Federal Trade Commission (FTC) notes in its online tips for consumers that auto and homeowner's insurance companies may use credit scores to decide how risky it would be to insure you. According to the FTC, insurers often see a higher credit score as a sign that you probably would present less of an insurance risk to them. Therefore, you will likely pay less for insurance if you have a high credit score.
Significance
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The Insurance Information Institute's website also notes the relationship between credit scores and insurance rates. According to the Institute, studies show that the way people manage credit affects insurance claims. The Institute adds that statistics indicate that people who have low credit scores are more likely to file an insurance claim. As a result, insurers are likely to charge them higher premiums to match the risk they're assuming to insure them.
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Considerations
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The Consumers Union website notes an investigation by "Consumer Reports" found that insurance companies calculate and use credit-based scoring differently. For example, some big companies only use the scores when handling new accounts. Other companies use the scores for new and renewed insurance policies. In addition, "Consumer Reports" found that data used for the scoring is often inaccurate or out of date. Consumers Union opposes the practice of using credit scores to determine insurance rates and has urged legislators to ban it.
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References
- FTC: Need Credit or Insurance? Your Credit Score Helps Determine What You'll Pay
- Bankrate.com: How Credit Scores Affect Insurance Rates
- Consumers Union: Consumer Reports Warns Drivers About the Secret Score Behind Auto Insurance Rates
- Insurance Information Institute: What Does My Credit Rating Have to do with Purchasing Insurance?
Resources
- Photo Credit photo checkbox credit image by Aleksandar Radovanovic from Fotolia.com
